UPM annual report 2015

UPM Annual Report 2015

127

128

contents

accounts

IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

37 Share-based payments

Share-based rewards

The Group’s long-term incentives consist of the Performance Share Plan

(PSP) for senior executives and the Deferred Bonus Plan (DBP) for other

key employees. In both PSP and DBP, earning of shares is subject to

achievement of predetermined earning criteria. PSP and DBP share

deliveries are executed by using already existing shares and the plans,

therefore, have no dilutive effect.

The Performance Share Plan consists of annually commencing

three-year plans. The plan is targeted at Group Executive Team (GET)

members and other selected members of the management and it con-

sists of a three-year earning period. The earned shares are delivered

after the earning period has ended. Under the plans, UPM shares are

awarded based either on group-level performance or total shareholder

return during a three-year earning period. Total shareholder return

takes into account share price appreciation and paid dividends. The

number of shares earned under Performance Share Plans as well as

other key figures of the plans are presented in the table below.

38 Related party transactions

The Board of Directors and the Group Executive Team

There have not been any material transactions between UPM and its

members of the Board of Directors or the Group Executive Team (key

management personnel) or persons closely associated with these mem-

bers or organisations in which these individuals have control or signifi-

cant influence. There are no loans granted to any members of the

Board of Directors or the Group Executive Team at 31 December 2015

and 2014. Shares held by members of the Board of Directors and

members of the Group Executive Team are disclosed in pages 65 and

69. Remuneration to members of the Board of Directors and the Group

Executive Team are disclosed in Note 7.

Associated companies and joint ventures

The Group’s recovered paper purchases in 2015 from associated

companies and joint ventures were close to 620,000 tonnes (620,000

tonnes). In Finland, the Group organises its producer’s responsibility of

recovered paper collection through Paperinkeräys Oy, in which the

Group has 33.1% interest. Austria Papier Recycling GmbH purchases

recovered paper in Austria, in which the Group has a 33.3% equity

interest. L.C.I s.r.l. is an Italian recovered paper purchasing company

in which the Group has a 50.0% interest. ASD Altpapier Sortierung

Dachau GmbH is a German recovered paper sorting company in

which the Group has a 50.0% interest. The purchases from those four

companies represented approximately 81% (80%) of total recovered

paper purchase amount from associated companies and joint ventures.

Recovered paper purchases are based on market prices.

The balances with the Group's associated companies and joint

ventures are presented in Note 21.

Pension Funds

In Finland, Group has a pension foundation, Kymin Eläkesäätiö, which

is a separate legal entity. Pensions for about 10% of the Group’s

Finnish employees are arranged through the foundation. In 2015 the

contributions paid by UPM to the Foundation amounted to EUR

10 million (7 million). The Foundation manages and invests the

contributions paid to the plan. The fair value of the Foundation’s assets

at 31 December 2015 was EUR 357 million (351 million), of which

49% was in the form of equity instruments, 40% in the form of debt

instruments and 11% invested in property and money market.

In the UK, the single UPM Pension Scheme operates under a Trust

which is independent from the Company. The Trust consists of various

Defined Benefit sections, all of which are closed to future accrual and

one common Defined Contribution section which is open to all UPM

employees in the UK. The Group made contributions of EUR 28 million

(6 million) to the Defined Benefit sections of the Scheme in 2015. The

next UK actuarial valuation will be in April 2016. The fair value of the

UK Defined Benefit fund assets at 31 December 2015 was EUR 409

million (363 million), of which 62% was invested in equity instruments,

28% in debt instruments and 10% in property and money market.

Subsidiaries and joint operations

The Group’s principal subsidiaries and joint operations are disclosed

in Note 36.

39 Commitments and contingencies

Contingent liabilities

The Group is a defendant or plaintiff in a number of legal proceedings

incidental to its operations. These lawsuits primarily involve claims

arising from commercial law issues.

Group companies

In 2011, Metsähallitus (a Finnish state enterprise which administers

state-owned land) filed a claim for damages against UPM and two

other Finnish forest companies. The claim relates to the Finnish Market

Court decision of 3 December 2009 whereby the defendants were

deemed to have breached competition rules in the Finnish roundwood

market. In addition to Metsähallitus, individuals and companies, as

well as municipalities and parishes, have filed claims relating to the

Market Court decision. The capital amount of all of the claims totals

EUR 196 million in the aggregate jointly and severally against UPM

and two other companies; alternatively and individually against UPM,

this represents EUR 34 million in the aggregate. It is expected that the

amounts claimed will change as a result of new claims, which have not

yet been served. In addition to the claims on capital amounts, the

claimants are also requesting compensation relating to value added

tax and interests. UPM considers all the claims unfounded in their

entirety. No provision has been made in UPM’s accounts for any of

these claims.

In 2012 UPM commenced arbitration proceedings against

Metsäliitto Cooperative and Metsä Board Corporation due to their

breaches of UPM’s tag-along right under the shareholders’ agreement

concerning Metsä Fibre Oy in connection with the sale of shares in

Metsä Fibre to Itochu Corporation. UPM claimed jointly from

Metsäliitto and Metsä Board a capital amount of EUR 58.5 million.

Metsäliitto and Metsä Board had sold a 24.9% holding in Metsä Fibre

to Itochu Corporation for EUR 472 million. In connection with the

transaction with Itochu, Metsäliitto had exercised a call option to

purchase UPM’s remaining 11% shareholding in Metsä Fibre for EUR

150 million. The arbitral tribunal rendered its final decision (arbitral

award) in February 2014 and ordered Metsäliitto and Metsä Board to

pay UPM the capital amount of EUR 58.5 million and penalty interest

and compensate UPM for its legal fees. As a result, UPM recorded an

income of EUR 67 million as a special item in Q1 2014. In May 2014

Metsäliitto and Metsä Board commenced litigation proceedings in the

Helsinki District Court challenging the arbitral award and requesting

the District Court to set aside the arbitral award or to declare it null

and void. On 18 June 2015 the District Court dismissed the actions by

Metsäliitto and Metsä Board. Metsäliitto and Metsä Board have

appealed to the Helsinki Court of Appeal.

On 27 March 2015 Helsinki District Court rendered decisions

regarding UPM’s action for invalidation of a patent of Neste Oil Oyj

(Neste) and Neste’s action for a declaratory judgment against UPM, in

which Neste sought the court’s declaration that based on its patent

Neste enjoys protection against the technology allegedly used by UPM

at its biorefinery. The District Court dismissed both actions. The deci-

sions have been appealed to the Helsinki Court of Appeal. Neste filed

a separate action with the Finnish Market Court in which Neste

requested the Market Court to prohibit UPM from continuing the

alleged infringement of Neste’s patent at UPM’s biorefinery. The Mar-

ket Court rejected Neste’s action on 3 December 2015. The decision

is not final.

In February 2015, the claims relating to the implementation of the

social plan after the closure of the Docelles mill in 2014 were brought

to Commercial Court of Epinal, France. The claimants, the co-operative

(SCOP) established by former employees of the Docelles mill as well as

certain former employees of the mill, seek the forced sale of the assets

of the Docelles mill to the SCOP for 2 euros and damages in the

amount of approximately EUR 55 million for the alleged lost sales.

Commercial Court dismissed all of the claimants’ claims in its judgment

on 29 September 2015. The judgment was appealed by the claimants

to Court of Appeal of Nancy, which dismissed all of the claimants’

claims in its judgment on 27 January 2016. The judgement is not final.

Other shareholdings

In Finland, UPM is participating in a project to construct a new nuclear

power plant unit Olkiluoto 3 (OL3) through its shareholdings in Poh-

jolan Voima Oy. Pohjolan Voima Oy is a majority shareholder of

Teollisuuden Voima Oyj (TVO), holding 58.5% of its shares. UPM’s

indirect share of OL3 is approximately 31%. Originally the commer-

cial electricity production of the OL3 plant unit was scheduled to start

in April 2009. The completion of the project, however, has been de-

layed. In September 2014 TVO announced that it had received addi-

tional information about the schedule for the OL3 project from the

AREVA-Siemens-Consortium (Supplier), which is constructing OL3 as a

fixed-price turnkey project. According to this information, the start of

regular electricity production of the plant unit would take place in late

2018. According to TVO, the proposed schedule is currently undergo-

ing detailed scrutiny.

Performance share plans

PSP 2012-2014

PSP 2013-2015

PSP 2014-2016

PSP 2015-2017

No. of participants (31 Dec. 2015)

Actual achievement

22.3%

90.4%

–

Max no. of shares to be delivered

to the President and CEO

48,837

197,976

125,000

to other members of GET

103,695

397,760

370,000

to other key individuals

85,855

402,280

347,500

345,000

Total max no. of shares to be delivered

238,387

998,016

842,500

840,000

Share delivery (year)

2015

2016

2017

2018

Earning criteria (weighting)

Operating cash flow

(60%) and EPS (40%)

Operating cash flow

(60%) and EPS (40%)

Total shareholder

return (100%)

Total shareholder

return (100%)

For PSP 2012–2014 and PSP 2013–2015 the gross amount of the actual no. of shares earned.

The Deferred Bonus Plan is targeted at other selected key employees of

the Group and it consists of annually commencing plans. Each plan

consists of a one-year earning period and a two-year restriction peri-

od. UPM shares are awarded based on achievement of group and/or

business area EBITDA targets. Prior to share delivery, the share re-

wards earned are adjusted with dividends and other capital distribu-

tion, if any, paid to all shareholders during the restriction period. Key

figures related to the Deferred Bonus Plans are presented in the table

below.

Deferred bonus plans

DBP 2012

DBP 2013

DBP 2014

DBP 2015

No. of participants (at grant)

580

560

395

350

No. of participants (31 Dec. 2015)

489

505

380

348

Max no. of shares to be delivered (at grant)

1,800,000

1,640,000

950,000

800,000

Estimated no. of shares to be delivered as at 31 Dec. 2015

616,584

255,451

312,637

302,869

Share delivery (year)

2015

2016

2017

2018

Earning criteria

Financial STI targets

Group/Business Area

EBITDA

Group/Business Area

EBITDA

Group/Business Area

EBITDA

For DBP 2012 the gross amount of the actual no. of shares earned.

The indicated actuals and estimates of the share rewards under the

Performance Share Plan and the Deferred Bonus Plan represent the

gross amount of the rewards of which the applicable taxes will be

deducted before the shares are delivered to the participants. The

amount of estimated payroll tax accruals at 31 December 2015

recognised as liabilities were EUR 14.7 million (9.9 million).